How Can I Use a Certificate of Deposit to Save Money?

1These days investors are looking for the best place to park their cash. They want to invest in relatively safe investments or just find the best current CD rates.

If you are planning to save your money with a certificate of deposit, here are the pros and cons.

What is a Certificate of Deposit?

A certificate of deposit, or a CD is a way for you to save your money with a longer time horizon in mind. Typically, when you put your money into a savings account, you can withdraw the money at any time.

Because you have this freedom to quickly withdraw into cash, also known as liquidity, the interest rate that the bank pays you will not be very high. In general, shorter term investments pay less. It is possible to earn over 50% with real estate for example, but that is not a very liquid investment.

It takes time to buy a house and potentially longer to put the house up for sale. Because it is not easily converted to cash quickly, real estate is considered a less liquid investment. With a CD, you are foregoing the right to immediately withdraw your money.

You may have to agree to deposit your money for 1 year, 5 years or even 10 years in order to get the promised interest rate. And if you withdraw your money early, there is usually a penalty.

Should I Save with an FDIC Insured CD?

One of the benefits of saving your money with a certificate of deposit is that the Federal Deposit Insurance Corporation (FDIC) promises to pay you up to a certain amount if your bank fails.

That is, if the bank where you deposit cash happens to go out of business, FDIC insurance will kick in and your deposits are covered under this insurance up to 250,000 dollars. If you have more that that amount in a bank, you are still insured up to $250,000.

Comparing this benefit with more risky investments, CDs provide a combination of liquidity, safety and growth potential.

How Do CDs Work?

When you purchase a CD, you commit to deposit a fixed sum of money for a fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals.

When you cash in or redeem your CD at maturity, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned.

If the issuing bank fails during the term of the CD, the principal balance of the CD, together with interest accrued at the time of the bank’s closure, is insured by the FDIC up to the applicable deposit insurance limit. Source

Where Can I Find the Best Current CD Rates?

Interest rates change daily and there are several places that you can find the best CD rates.

Most people automatically search online but some of the top listings are controlled by the biggest players in banking. Here are a few typical sources for current CD rates.

  • The Wall Street Journal
  • Bankrate.com

Are you looking to invest and save your money with a cd?

If you need deeper work around healing your relationship with money or overcoming your blocks and fears, maybe it’s time for some money therapy.   

 

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